Corporation tax/Dividend

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion
Hi all

Can anyone help me with the following questions. I am doing the corporation tax return for a limited company (only the director, no other employees). I used the online corporation tax calculator from hmrc which is fine and shows that the corp tax after the marginal rate relief due is £1,373.52. My problem now is with the dividend the director has received for the year. He has been withdrawing money all year and when I put together the company accounts it shows he has helped himself to £16,125. This is a big increase from the year before as he only paid dividend of £1000 (accounts prepared by different accountant at the time). Do I now need to work out how much tax to pay on the dividend of £16,125. which being a small company looks like 19% under non-corporate distributions? or is there a set amount of tax needed to be paid for dividend received. Not sure what to do. Sorry to be going on any help would be advised. I do not know any other way around this as the directors bank balance showed £14,988 compared to £1,914. You can clearly see he has been helping himself. HELP stuck

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Dividends paid before 1 April 2006 are not subject to non coroporate distributions. If your year end is before this date then you have to calculate whether the underlying rate of corporation tax is lower than 19%. If it is then NCD rules apply.

    To check the underlying rate of corp tax take the CT due and divide this by the PCTCT multiply this figure by 100 to arrive at a %. If this % is below 19% then NCD applies.

    If the dividend is paid post 1 April 2006 then you will vote a dividend in the accounts to meet the withdrawals made by the director - no further tax provision is necessary as this dividend will be put on to the directors self assessment return and dividends are always paid out of post tax profits.

    You must make sure, however, you have sufficient reserves available to pay the dividend. You cannot pay a dividend in excess of the company reserves. If there aren't enough reserves to declare enough dividend to meet the withdrawals, then the company will have an overdrawn directors loan account (effectively a debtor) on which S419 corporation tax is due.

    kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Hi Steve

    The underlying rate of corporation tax is 10.30%. The accounting year end is 31st July 2006. The problem is he has helped himself to funds all through the year and I am not sure how to show when he paid himself dividend as he has so many withdrawals. Therefore do I charge 19% on the whole dividend?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Presumably the dividend is going to be voted on 31 July 2006 (financial year end) therefore you don't have to do anything with NCDs as the dividend is voted post 1 April 2006. If the dividend is (say) £15,000, then £15,000 will go into the financial statements, and (£15,000 x 100/90)=£16,666.67 will go as a gross dividend on the directors SA return which will be granted a 10% tax credit.

    You never charge corporation tax on dividends - they are ALWAYS paid out of post tax profits.

    Hope that helps.

    Kind regards
    Steve


  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Just on a point of clarification. The amounts withdrawn by the director throughout the year are NOT dividends - these are the withdrawals. It is common to mis-interpret a £500 cash withdrawal on 3 August 2005 as a dividend.

    Dividends are the amounts agreed at shareholder meetings which are to be paid to the directors and covered by the statutory paperwork (Meeting Minutes and Dividend Vouchers).

    If the dividend paperwork is dated 31 July 2006 and the amount is credited to the directors loan account on 31 July 2006 then the dividend is deemed to have been paid on 31 July 2006.

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Are you saying that nothing is charged on withdrawals? getting abit confussed now I thought withdrawals are more to do with partnership accounts.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    A withdrawal of cash from the company's bank account by the director is a "withdrawal". It isn't a dividend. The term withdrawal is not reserved for just partnership/sole traders. When I say withdrawal, I mean anything withdrawn from the business by the director for his personal use.

    Over the year these withdrawals could amount to £16,000. A £16,000 dividend has to be voted in the year-end financial statements to repay these withdrawals back to the company. The entries are debit dividends, credit directors loan account (or directors bank account). The company is a separate entity - despite what directors think - the company's money is not theirs. They have to repay their personal withdrawals and this is usually done by way of dividend.

    Again I will re-iterate that cash withdrawals throughout the year are not dividends. A dividend is only a dividend if it is agreed by the shareholders (usually the directors/shareholders are the same person(s). A dividend is formalised by way of Meeting Minutes and Dividend Vouchers.

    Regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Thank you so much this makes more sense now. The director has been taking money out for his own use throughout the year. This comes to about £16K. Even though he has done this it has not been agreed that this is dividend. Therefore fore now I do not need to pay tax on this amount. I have shown this amount as dividend in the company accounts. I take it this is wrong as it has not been agreed. how do I show this is the accounts then?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    If, say, £16k has been withdrawn and £5k is not to be a dividend then £5k will be a debtor as the Director must pay this money back but not by way of dividend.

    The double entry to correct this will be:

    Credit directors loan account (or directors bank)
    Debit debtors.

    I'm still not sure what you are referring to saying "I do not need to pay tax on this amount".????

    Kind regards
    STeve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Sorry I understand I will need to pay tax on this amount but not yet as efficially it has not been agreed as a dividend
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    What are you paying tax on, though? Are you on about the directors personal tax?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    no when it is declared as dividend I will then have to pay non-corporate distributions rate
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    no no no!! Don't do anything with non corporate distributions.

    NCDs were abolished for dividends declared after 1 April 2006. The dividend will be declared on 31 July 2006 so NCD's DON'T apply!!

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Sorry yes you are right. How should I treat this
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    The directors drawn out £16k but not all of it is to be treated as a dividend. For example, let's say £6k is to be repaid by the director because it's been agreed that this won't be a dividend. So we have:

    £10k dividend
    £6k non-dividend

    First remove the £6k from the directors loan account by crediting directors loan account £6k and debit debtors (say, sundry debtors) £6k. This leaves the £10k which will be a dividend.

    You then credit the directors loan account with £10k and debit dividends £10k. Don't do anything taxwise - the tax on the dividends kicks in when the directors personal self assessment return is prepared.

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Corporation tax/Dividend

    Thanks for all of your help. This site is great for advice

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